families (below 80 percent of median income) living in low income areas), and a Geographically Targeted Goal (with at least 31 percent of the dwellings units financed by each GSE's mortgage purchases must be for units in underserved areas (i.e., central cities, rural areas, and other underserved areas based on income and minority concentration) as defined by HUD rules).

Implementation of the housing goals has had a substantial impact on Fannie Mae's and Freddie Mac's activities, more than doubling their low and moderate income housing business since they were first established in 1993. Both GSEs almost always have met and usually exceeded the goals levels in place through the year 2000 (the last year for which data have been published by HUD). Yet despite these improvements, HUD noted last year that the "market share for each (GSE) of the affordable housing lending categories is less than their share of the overall market; and they account for a very small share of the market for important groups such as minority first-time homebuyers." (Bunce, 2002, 5). The GSEs' have pledged to do better and Fannie Mae, for example, has undertaken a major initiative to increase funding of minority home purchase loans. Yet the HUD data suggests that there is considerable room for improvement.

Thus, we were pleased that Secretary Martinez in his testimony before this committee made a number of constructive proposals aimed at spurring additional improvements in the GSES' affordable housing performance. The GSE Act prohibits HUD from establishing enforceable subgoals for the low and moderate income housing goal and the geographic area goal. Subgoals are a logical tool to ensure that the GSEs adequately consider the most underserved sectors of the mortgage market. For example, targeting minority and other underserved geographies would be ideal candidates for subgoals and would help to boost minority homeownership levels.

However, the Secretary's proposal is not sufficient unless HUD places greater emphasis than it has on performing these important responsibilities. For example, HUD let slip the establishment of new goals for 2004. The existing goals were originally set to end at the end of this year. HUD's failure to take action this year means that the current levels rollover for at least another year.

Both Fannie Mae and Freddie Mac say they surpassed their goal levels in 2001 and 2002, yet HUD tallies have yet to be released for these years. But we know that both enterprises rely on regulatory bonus points that provide 2 for 1 weighting found in the current rules to achieve their goal levels. These bonus point provisions are intended to increase the GSEs activity in the small multi-family and single family rental housing finance market. They are set to expire in December necessitating a substantial increase in both GSES' affordable housing activities next year in order to meet their goal levels. We believe that these bonus points should not be extended without a full rulemaking process that would include opportunities for public comment to help the department assess the impact of this feature and considering whether they are worth continuing.

Also, the 2000 affordable housing goal rule implemented an additional bonus point system that is exclusive to Freddie Mac. Called a "temporary adjustment factor" (TAF),

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this additional bonus point system permits Freddie Mac to receive additional credit for each qualifying multifamily mortgage for properties with more than 50 units. Although HUD had originally established the TAF as 1.2 (i.e., 20 percent added weighting per eligible unit, Freddie Mac was able to obtain a legislative amendment which increased the TAF to 1.35 units of credit (or 35 percent additional weighting per unit). According to data provided by Freddie Mac, the TAF added almost 3 percentage points to Freddie Mac's low and moderate income housing goal performance, over 1 percent to its geographically targeted goal performance, and 1.4 percent to its special affordable goal performance. The TAF is due to expire this year and should not be extended.

Additionally, we are extremely disappointed that HUD has continued to resist disclosing the results of a major fair lending review the department has undertaken and completed of the GSES automated underwriting systems (AUS). The vast majority of mortgages made by lenders today are run through these systems, which rely on credit scoring and other statistical measures to rate creditworthiness. In effect, these systems determine who qualifies for prime mortgages and at what price. Borrowers that do not meet GSE standards, therefore, often are relegated to the more expensive subprime market. Credit scoring models almost always have disparate impacts for minorities, but they have not been subject to a full-scale regulatory review to determine whether they are discriminatory. The purpose of the HUD fair lending review of the AUS is to determine an answer to this essential question. Chairman Baker and others in Congress have written to HUD asking for the results of this inquiry, but to my knowledge they have yet to be forthcoming with the requested information.

The 2000 HUD rule establishing the existing goals levels also recognized that the GSEs, “have a public responsibility to help eliminate predatory mortgage practices which are inimical to the home financing and homeownership objectives that the GSEs were established to serve." (Federal Register, October 31, 2000, 65044) The rule affirmed corporate policies adopted by the GSEs at the time indicating that they would not purchase predatory mortgages by disallowing them from receiving goals credit for predatory loan purchases. HUD should be building on these prior actions by continuing to challenge the GSEs to expand upon these prohibited features and act more aggressively to challenge predatory practices in the subprime market. Unfortunately, HUD has not taken these critical steps.

In addition to a number of the suggestions recommended by Secretary Martinez, we believe that GSE performance toward meeting their goals could be improved through expanded public disclosure of these GSEs mortgage activities and through better reporting to Congress by HUD. Specifically, we recommend the following actions be taken:

Improving the GSE Public Use Data Base.

The 1992 GSE Act required HUD to establish a public use data base and provide expanded public disclosure of GSE mortgage activity. Unfortunately, this data base does not provide sufficiently useful information for enabling housing consumers and local

community groups to determine for themselves how active the GSEs are in their own localities. While some data is provided on GSE activity at the census tract level is not as detailed as data provided by mortgage lenders under the Home Mortgage Disclosure Act (HMDA). In particular, local GSE data does not specify at the census level mortgage type as well as other important loan characteristics (e.g., whether the purchase was a home purchase loan or a refinancing, whether it was a prime or subprime loan, loan to value ratios, loan amount). Expanded reporting of these data elements would greatly improve the utility of this data base and assist with a more complete analysis of GSE activities in communities throughout the nation.

■ Better reporting to Congress on GSE affordable housing activities and departmental plans for establishing new goals.

The GSE Act requires each GSE to report annually on its affordable housing performance, but does not require their regulator to report in a comparable way. While HUD publishes reports on GSE activities, annual reporting detailing the goal levels the GSES' achieved and the activities undertaken to reach these levels would help to circulate this information more widely. These reports should distinguish between home purchase and refinancing purchases, purchase levels by different household income levels, and detail the extent to which the levels were achieved through the purchase of subprime mortgages. The department should also be required to report to Congress to explain delays in undertaking new rulemaking to set new housing goals in situations where the original term for these goals has expired or due to expire.

In closing, let me reiterate that we believe it is in everyone's interest to have strong regulatory oversight of the GSEs. In so doing, we urge the committee to proceed with caution and resist the urge to make needless changes that detract from the GSEs' ability to perform their public mission.

Mr. Chairman, this concludes my written testimony. Thank you again for the opportunity to testify today and I will be glad to answer any questions that you and other committee members have for me.

STATEMENT OF GEORGE D. GOULD

PRESIDING DIRECTOR

FREDDIE MAC

BEFORE THE COMMITTEE ON FINANCIAL SERVICES

OF THE

U.S. HOUSE OF REPRESENTATIVES

September 25, 2003

Thank you, Chairman Oxley, Ranking Member Frank and members of the Committee. Good morning. It is a pleasure to be here today. My name is George Gould.

I have served on Freddie Mac's board since 1990 and am currently the Presiding Director and Chairman of the Governance and Finance Committees. I am also vice chairman of Klingenstein, Fields & Company, a firm that manages individual assets and estates. Prior to joining this firm, I served as Undersecretary for Finance at the Department of Treasury from 1985 to 1988. At the request of President Reagan, I chaired the Working Group on Financial Markets to examine the effect of the October 19, 1987 stock market crash.

I welcome the opportunity to be here today to discuss key aspects of a strengthened regulatory structure for Freddie Mac and Fannie Mae. Freddie Mac plays a central role in financing homeownership and rental housing for the nation's families. Our job is to attract global capital to finance America's housing. Given the importance of housing to our economy, and the importance of housing finance to global capital markets, it is critically important that our regulatory structure provide world-class supervision. Hence, I applaud Chairman Oxley, Congressman Frank and the Administration for their thoughtful deliberations on these questions of global importance.

Freddie Mac supports much of the Administration's proposal on regulatory reform. Before expressing our views on key aspects of the proposal, I would like to say a few words about the resolution of Freddie Mac's accounting issues and our continued safety and soundness.

Resolution of Accounting Issues

On January 22, 2003, Freddie Mac announced, in conjunction with our new independent auditor, PricewaterhouseCoopers, the need to restate earnings for 2000, 2001 and 2002. In our June 25, 2003 press release we described the major factors leading to the need to restate earnings, a copy of which is provided for the record. In stark contrast to other recent corporate restatements, we expect Freddie Mac's restatement to show a large cumulative increase in earnings for the prior years. We also expect it to result in a large increase in our regulatory capital surplus.

While the restatement will represent an important milestone, we remain determined to bring our financials completely up to date as quickly as possible. Once we resume timely reporting of our financials next year, we will proceed with our commitment to complete the process of voluntarily registering our common stock with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 so that we become a reporting company under that Act. We are irrevocably committed to the voluntary agreement we announced last summer to submit to the periodic financial disclosure reporting requirements that apply to registrants. Freddie Mac reaffirmed this commitment in a letter to Treasury Secretary John Snow on July 14, 2003.